Deutsche Bank warns RI of overheating

Signs of growth: Workers construct a new apartment building in Jakarta. Bank Indonesia’s low interest rate policy is expected to further push up lending growth, which had already reached 26 percent as of October last year. JP/Nurhayati

Taimur Baig, director and chief economist of Deutsche’s global market research unit, said in Jakarta on Monday that early indications of overheating could be seen in loan growth in the nation’s banking system.

In addition to high lending growth, government efforts to boost economic activities and the estimated high level of consumer spending, might also contribute to overheating.

All of those factors combined could lead into over-investment, over-consumption and overshooting of asset prices, Baig said.

“We expect to see some sort of counter-cyclical policies from policy makers with respect to controlling the upward momentum of the market. The risk is that if they don’t do that, we could see overheating,” Baig told reporters at a press conference, citing excessive loan growth and low interest rates factors to be addressed.

Given government targets of 6.7 percent economic growth and 5.3 percent inflation for this year, Baig said loan growth should be around 24 percent and no higher than 30 percent.

Lending in Indonesia’s commercial bank system was up 26 percent as of October 2011.

“The fear is that Indonesia will get ahead of itself. It’s in a very strong position, but if macroeconomic policy is adding even additional encouragement to the economy to accelerate, it is possible that we could see some macroeconomic distortion,” he said.

Overheating in Indonesia could mean excessive import demand — which might shrink the current account surplus on Indonesia’s balance of payments, which might in turn affect the rupiah — and cause asset prices such as for property and equity to overshoot, Baig said.

Government officials brushed off overheating concerns, with Coordinating Economic Minister Hatta Rajasa citing easing inflationary pressures — at 20-month low of 3.79 percent as of December — and a supply-side push by providing incentives to boost investment to avoid overheating.

The central bank, however, expressed concern over rapidly growing lending for some consumer loans, primarily property and automotive loans.

Bank Indoneisa said it might work with the Capital Market and Financial Institutions Supervisory Agency (Bapepam-LK) to set minimum down payments for car and motorcycle loan financing.

“If the central bank views growth as too fast and continuing, it may issue a policy to slow [growth],” BI governor Darmin Nasution has said.

Indonesia’s motorcycle sales — the biggest in Southeast Asia — are expected to top 8.22 million units in 2011, while car sales might top 850,000 units, representing 10-percent increases in both categories over the prior year.

Car and motorcycle sales figures are expected to continue to increase in the coming years.

The International Monetary Fund (IMF) warned in 2011 of potential overheating in Indonesia due to strong demand, while classical capacity constraints, such poor infrastructure, continued to exist, senior resident representative in Indonesia Milan Zavadjil said.

“The potential is there but it will depend on many factors including global commodity prices,” he said.